Indiana's Manufacturing Advantage

With General Motors Corp. announcing that it will cut 25,000 jobs, many
Hoosiers are concerned about the impact on our state. Local leaders tend to
be optimistic about the prospects for their individual communities because
GM has made significant investments in local plants in recent years. At this
point, however, for anyone outside GM, the information the company will use
to make its final determination of plant reductions or closings is not available.

We may gain a better understanding from what has been happening to employment
in Indiana and the United States over the past 10 years. With data for May
1995 and 2005, we can see how Indiana has tracked with, or differed from,
the nation.

In 1995, Indiana had 2.4 percent of the nation’s nonfarm employment;
by 2005, this figure had fallen to 2.2 percent (see Figure 1).
Manufacturing was, and still is, where Indiana is most differentiated from
the nation. In 1995, the Hoosier state had 3.8 percent of U.S. manufacturing
jobs, compared to just over 4 percent in 2005. Only Indiana’s manufacturing
and miscellaneous sectors saw an increase in Indiana’s share of U.S.
employment.

Figure 1: Indiana's Share of U.S. Employment,* 1995 and 2005

Ten years ago, the largest sector in Indiana was manufacturing with 651,400
jobs—79,900 above trade, transportation and utilities. Today the positions
are reversed. Trade, transportation and utilities are on top with 579,700
jobs—4,400 above manufacturing (see Table 1).

Table 1: U.S. and Indiana Employment,* 1995 and 2005

During the decade, from 1995 to 2005, manufacturing declined from 23.5 percent
of all nonfarm jobs in Indiana to 19.4 percent. Figure 2
shows how several sectors of the state’s economy increased their shares.
For example, professional and business services (accountants, attorneys, architects,
etc.) increased from 7.4 percent to 9.2 percent of the state’s nonfarm
jobs. Nationally, manufacturing’s share of nonfarm employment went from
14.8 percent to 10.7 percent.

Figure 2: Indiana's Job Distribution

Another way to look at these changes is to ask, “What portion of
jobs would have to be shifted to other sectors to obtain identical distributions?”
For example, in 1995, 9.1 percent of Indiana jobs would have to have been
shifted to other sectors to obtain the same percentage distribution as the
United States in that year. In 2005, 8.8 percent of the state’s jobs
would have to have been changed among the various sectors. This tells us that
Indiana’s employment structure is moving toward the national pattern.

Between 1995 and 2005, most Indiana sectors did not grow as rapidly as
their U.S. counterparts (see Figure 3). The differences in
growth rates can be converted into jobs. This is the traditional “shift-share
analysis,” where a state or community is compared with a larger unit
(the nation or a state).

Figure 3: Percent Change in Employment, 1995 to 2005

First, we calculate the number of jobs Indiana would have gained if it
had grown at the national rate (see Column A in Table
2). This would be Indiana’s share of national growth. The actual
change in employment is shown in Column B. Subtracting the
hypothetical change from the actual change gives us the shift in employment
that took place, as shown in Column C.

Table 2: Shift-Share Analysis, 1995 to 2005

Thus, Indiana may be said to have had a competitive advantage in professional
and business services. Had the state experienced the same growth rate as the
nation’s 32 percent, it would have added about 65,900 jobs in this sector.
However, the state’s growth rate was 32.5 percent, and it actually gained
67,000 jobs in professional and business services. Thus, we say that the state
had a differential advantage of nearly 1,100 jobs in this sector.

Manufacturing was our best performing sector over the past 10 years in
these terms. If the Hoosier state had lost manufacturing jobs at the national
rate, it would have seen a decline of over 111,700 jobs. But the state lost
76,100 which left a differential advantage of 35,649 jobs.

If these data are indicative of future changes, we may expect that the
GM job cuts will not be as much to the state’s disadvantage as might
be expected. There seems to be something about Indiana that says this state
remains a good place for manufacturing activity.

By Morton Marcus, Director Emeritus
Indiana Business Research Center, Kelley School of Business, Indiana University